Home grants scheme blasted

Leo Shanahan

THE first home buyers' grant has forced house prices up in recent years, working against its aim of making new homes more affordable, a Senate inquiry has found.

Urging an overhaul of the scheme, the Senate Committee on Housing Affordability found that the system of $7000 grants for all first home buyers had "benefited existing home owners rather than those seeking to enter the market". The committee, comprising Coalition and Labor senators, also found that negative gearing and state fees such as stamp duty were compounding the affordability crisis.

The findings coincided with a new report warning that capital city house prices would soar again next year, as the nation's fastest population growth in two decades outweighs the effects of higher interest rates.

Economic forecaster BIS Shrapnel predicted median house prices in Melbourne would rise by 16% in the three years to June, 2011. "Australia is experiencing record net overseas migration flows, which is underpinning what is already strong underlying demand for housing," the forecaster said.

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The failure of construction to keep pace with population changes was a key focus of the Senate committee findings released last night.

In its report, the committee recommended an overhaul of the first home buyers' scheme so that grants would be increased for those buying new homes, and cut for those buying existing ones. In effect, this would involve a return to an earlier version of the scheme launched by the Howard government, under which new home buyers got $14,000 and buyers of existing homes $7000.

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The bias towards new homes, aimed at stimulating construction, would come on top of existing incentives in Victoria where the State Government offers a $5000 bonus for new purchases and an additional $3000 for those buying in regional areas.

Liberal Senator Marise Payne, who chaired the inquiry, denied that the proposal to review the grant was an admission of structural flaws in the system, as it merely mirrored the previous policy of paying double to those buying new homes.

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She said reverting to a system that favoured new home purchasers could help address "some of the supply issues" affecting housing affordability.

The report found that, on the demand side, the housing affordability crisis had been fuelled by higher incomes, smaller households, population growth, a long period of low interest rates, more access to credit, and a taxation system encouraging multiple property purchases. On the supply side, the report blamed state and territory governments for complex planning processes, developer infrastructure charges and a shortage of skilled labour.

Stamp duty was also blamed for higher prices, with the report saying states had "failed to adjust stamp duty thresholds to keep pace with house prices".

Senator Payne said that the current system of stamp duty often encouraged people to buy larger houses than they needed to. The committee recommended exemptions on the tax for all first home buyers and retirees.

"They are quite simply an inefficient tax which impedes people moving to more appropriate housing. Furthermore, as they have not been indexed, they are a growing proportion of incomes," Senator Payne said.

The report said building houses on the outskirts of cities was not the answer to unaffordability. "This simply shifts the costs from housing to the cost - in dollars and time - of transport," it said. "The aim must be to build affordable housing in areas where infrastructure can provide for and attract new residents," the senators said.

Their report proposed reviewing the tax discount for capitals gains on investor housing, exceptions from land tax for the home owner, and negative gearing. They also urged new measures to encourage construction of more public housing and rental properties in areas of greatest need.

Chris Lamont, of the Housing Industry Association, said the proposed changes to the first home buyers' grant were welcome, as the scheme was pushing prices up in its current form. "The first home owners grant was a demand measure and wasn't equalised or offset by any supply response," he said.

He said any review of stamp duty had to take into account funding arrangements between states and the Commonwealth, which he argued was making states reliant on land taxes. He said stamp duty was often confusing and unfair in its current form.

Mr Lamont said abolishing negative gearing would be "the worst thing you could do" for the rental market. "If you were to abolish negative gearing, stand by for 25% increases in rent year on year," he said.

Federal Housing Minister Tanya Plibersek said last night she had no immediate plans to change the first home buyers' grant, a move that would need the approval of states and territories.